management s discussion and analysis

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1 management s discussion and analysis Management s Discussion and Analysis Set out below is a review of the activities, results of operations and financial condition of ( Uranium One ) and its subsidiaries (collectively, the Corporation ) for the year ended December 31, 2008, together with certain trends and factors that are expected to impact its 2009 financial year. Information herein is presented as of March 11, 2008 and should be read in conjunction with the annual consolidated financial statements of the Corporation for the year ended December 31, 2008 and the notes thereto, on file with the Canadian provincial securities regulatory authorities (referred to herein as the consolidated financial statements ). The Corporation s consolidated financial statements and the financial data set out below have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ). All amounts are in US dollars and tabular amounts are in thousands, except where otherwise indicated. Canadian dollars are referred to herein as C$. South African rands are referred to herein as ZAR. Australian dollars are referred to herein as A$. Uranium One completed a business combination with UrAsia Energy Limited ( UrAsia Energy ) on April 20, The transaction was treated as a reverse take-over under GAAP, with UrAsia Energy identified as the acquirer and Uranium One as the acquiree. Consequently, the historic figures used herein for periods up to and including March 31, 2007 are those of UrAsia Energy. References herein to the 2007 financial year and the 2008 financial year refer to the years ended December 31, 2007 and December 31, 2008, respectively. The common shares of Uranium One are listed on the Toronto and Johannesburg stock exchanges ( TSX and JSE, respectively). Uranium One s convertible unsecured subordinated debentures due December 31, 2011 are also listed on the TSX. Additional information about the Corporation and its business and operations can be found in its continuous disclosure documents. These documents are available under the Corporation s profile at This Management s Discussion and Analysis includes certain forward-looking statements. Please refer to Forward-Looking Statements and other information. MANAGEMENT S DISCUSSION AND ANALYSIS 1

2 HIGHLIGHTS Total production during 2008 was 2,864,700 pounds of U 3 O 8, an increase of 41% from total production of 2,038,700 pounds of U 3 O 8 during Attributable sales volumes during 2008 were 2,210,900 pounds of U 3 O 8, an increase of 37% compared to attributable sales volumes of 1,608,700 pounds of U 3 O 8 during Average realized U 3 O 8 sales price during 2008 was $68 per pound, generating revenue of $149.8 million, compared to an average realized U 3 O 8 sales price of $83 per pound, generating revenue of $134.0 million during Earnings from mine operations were $96.7 million during 2008, a 5% decrease over earnings from mine operations of $101.8 million during 2007, primarily due to a lower realized U 3 O 8 sales price. In June 2008, the Corporation concluded a $100 million senior secured revolving credit facility with Bank of Montreal and The Bank of Nova Scotia. In November 2008, the Corporation received an inaugural dividend of $40 million (net of Kazakh withholding taxes) from its Betpak Dala joint venture. In December 2008, the Corporation entered into joint venture agreements under which Mitsui & Co., Ltd. acquired a 49% interest in the Australian assets of Uranium One, including the Honeymoon Project for a minimum cash commitment of approximately $73 million (A$104 million). The Corporation wrote down mineral interests, plant and equipment by $2.4 billion (net of future income tax recoveries) in 2008: $1.3 billion on Dominion; $1.0 billion on properties in the United States; and $0.1 billion on Honeymoon and Australian exploration. In February 2009, the Corporation announced a C$270 million private placement and formation of a strategic relationship with a Japanese consortium. OPERATIONS AND PROJECTS Akdala - attributable production during 2008 was 1,873,600 pounds of U 3 O 8 ; cash operating costs for 2008 were $14 per pound of U 3 O 8 sold. South Inkai received industrial production approval in December 2008 to ramp up production over the next three years to attributable production of 3,600,000 pounds of U 3 O 8 and commenced commercial production on January 1, 2009; attributable pre-commercial production during 2008 was 792,200 pounds of U 3 O 8. Kharasan commenced mining on a pilot production basis in September 2008; attributable pre-commercial production during 2008 of 9,400 pounds of U 3 O 8. United States - continued with permitting activities at the Moore Ranch, Antelope and JAB projects in Wyoming; in late 2008, the start-up of the Hobson, Texas ISR processing facility was deferred pending the delineation of additional resources and the receipt of all required permits. Dominion - pre-commercial production during 2008 was 189,500 pounds of U 3 O 8 ; on October 22, 2008, operations were suspended and the project was placed on care and maintenance pending the evaluation of available strategic alternatives. FINANCIAL CONDITION AND LIQUIDITY Recent disruptions in global credit and financial markets have resulted in a significantly deteriorating economic climate, which contributed to the asset impairments discussed elsewhere in this document. In response to these conditions, the Corporation has taken a number of steps, following the initial sustained drop in the uranium price, to reduce or defer previously planned capital and corporate expenditures, including placing the Dominion Project on care and maintenance, deferring project start-up at Hobson, obtaining a partner to fund the development of Honeymoon and implementing significant reductions in exploration expenditure and corporate costs across all operations. In October 2008, the Corporation drew down $65 million under its credit facility as an internal cash reserve and in February 2009 negotiated a C$270 million private placement with a Japanese consortium. The Corporation will therefore have cash resources sufficient to sustain capital and corporate expenditures planned for Capital expenditures by the Betpak Dala and Kyzylkum joint ventures are funded through the joint ventures operating cash flow or by way of third party debt facilities. The Corporation s Australian joint ventures, including Honeymoon, will be funded from the cash commitment of approximately $73 million (A$104 million) from Mitsui in The Corporation is currently evaluating the application of the proceeds from the private placement with the Japanese consortium. The potential uses of these proceeds include acceleration of the Corporation s growth and development plans, the reduction of debt and working capital. MANAGEMENT S DISCUSSION AND ANALYSIS 2

3 OUTLOOK In 2009 to the end of February, Betpak Dala has received more than its full allocation of sulphuric acid and Betpak Dala and Kyzylkum are expected to have sufficient sulphuric acid supplies to meet their 2009 production targets at Akdala, South Inkai and Kharasan. Total production for 2009 is estimated to be 3.5 million pounds of U 3 O 8, comprising 1.8 million pounds from Akdala, 1.5 million pounds from South Inkai and 0.2 million pounds from Kharasan. Total production for 2010 is estimated to be 5.6 million pounds of U 3 O 8. During 2009, the average cash cost per pound of U 3 O 8 sold is expected to be approximately $15 per pound at Akdala and $28 per pound at South Inkai. The Corporation currently has contracts for the sale of an aggregate of 26 million attributable pounds of U 3 O 8 ; 16 million pounds of this material are contracted at weighted average floor prices of approximately $47 per pound. The remainder of contracted attributable sales is not subject to floors and such sales are therefore directly related to the spot price of U 3 O 8, except for 910,000 pounds, which will be sold at an average fixed price of $79 per pound, subject to escalation. For 2009, the Corporation expects to sell an aggregate of 2.8 million attributable pounds of U 3 O 8. The Corporation has already contracted for the sale of 2.2 million attributable pounds of U 3 O 8 in 2009, of which 700,000 pounds have weighted average floor prices of approximately $43 per pound. Attributable inventory levels at Betpak Dala are expected to increase from approximately 1.2 million pounds of U 3 O 8 at December 31, 2008 to approximately 1.8 million pounds of U 3 O 8 by the end of In 2009, the Corporation expects to incur capital expenditures of $21 million for the development of its assets in Wyoming and to contribute $6 million to the costs of constructing a sulphuric acid plant at Zhanakorgan in Kazakhstan. General and administrative expenses, excluding stock-based compensation, are expected to be approximately $28 million for 2009; care and maintenance costs at Dominion are expected to be $12 million for The Corporation carries unrealized foreign exchange translation losses of $244.8 million relating to its investment in Uranium One Africa Limited on its balance sheet. The foreign exchange losses were not taken into consideration in calculating the impairment on Dominion and would only be realized in the statement of operations if the Corporation sells its investment in Uranium One Africa Limited. MANAGEMENT S DISCUSSION AND ANALYSIS 3

4 KEY STATISTICS TOTAL PRODUCTION Attributable production from Akdala (lbs of U 3 O 8 ) 1,873,600 1,827,200 Attributable pre-commercial production from South Inkai (lbs of U 3 O 8 ) 792,200 40,200 Pre-commercial production from Dominion (lbs of U 3 O 8 ) 189, ,300 Attributable pre-commercial production from Kharasan (lbs of U 3 O 8 ) 9,400 - Total production 2,864,700 2,038,700 FINANCIAL Attributable production (lbs of U 3 O 8 ) (1) 1,873,600 1,827,200 Attributable sales (lbs of U 3 O 8 ) (1) 2,210,900 1,608,700 Average realized sales price ($ per lb of U 3 O 8 ) (2) Average cash cost of production sold ($ per lb of U 3 O 8 ) (2) Revenues ($ millions) Earnings from mine operations ($ millions) Net loss from continuing operations ($ millions) (2,333.6) (16.2) Loss per share from continuing operations basic and diluted ($ per share) (4.98) (0.05) Loss from discontinued operations ($ millions) (122.3) (1.4) Loss per share from discontinued operations basic and diluted ($ per share) (0.26) (0.00) Net loss ($ millions) (2,455.8) (17.6) Net loss per share basic and diluted ($ per share) (5.24) (0.05) Adjusted net earnings ($ millions) (2) Adjusted net earnings per share basic ($ per share) (2) Notes: (1) Attributable production and sales are from assets that are in commercial production therefore only Akdala in 2007 and (2) The Corporation has included non-gaap performance measures: average realized sales price per pound of U 3 O 8, cost per pound of U 3 O 8 sold, adjusted net earnings and adjusted net earnings per share. In the uranium mining industry, these are common performance measures but do not have any standardized meaning, and are non-gaap measures. The Corporation believes that, in addition to conventional measures prepared in accordance with GAAP, the Corporation and certain investors use this information to evaluate the Corporation s performance and ability to generate cash flow. The additional information provided herein should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. See Non-GAAP Measures. MANAGEMENT S DISCUSSION AND ANALYSIS 4

5 OVERVIEW Uranium One is a Canadian corporation engaged through subsidiaries and joint ventures in the mining and production of uranium, and in the acquisition, exploration and development of properties for the production of uranium in Kazakhstan, the United States, Australia, South Africa and Canada. Through the Betpak Dala joint venture, Uranium One owns a 70% interest in the Akdala and South Inkai uranium mines in Kazakhstan. The Corporation holds a 30% interest in the Kyzylkum joint venture, which owns the Kharasan Project in Kazakhstan. In the United States, the Corporation owns projects in the Powder River and Great Divide basins in Wyoming. The Corporation has suspended operations at its Dominion Project in South Africa and placed it on care and maintenance while evaluating strategic alternatives for the project. The Corporation owns a 51% interest in the Honeymoon Uranium Project in Australia. The Corporation owns, either directly or through joint ventures, a large portfolio of uranium exploration properties in the western United States, South Australia and South Africa. The following are the Corporation s principal mineral properties and operations (discussed in more detail below): Operating mines Entity Project Location Status Ownership Betpak Dala LLP Akdala Uranium Mine Kazakhstan Producing 70% J.V. interest Betpak Dala LLP South Inkai Uranium Mine Kazakhstan Producing 70% J.V. interest Advanced development project Entity Project Location Status Ownership Kyzylkum LLP Kharasan Uranium Project Kazakhstan Commissioning (1) 30% J.V. interest The Corporation is also developing the following mineral properties: Entity Project Location Status Ownership Powder River Basin, Wyoming Energy Metals (Moore Ranch, Peterson, Ludeman, USA Development 100% interest Corp. (US) Allemand-Ross, and Barge) Energy Metals Corp. (US) Great Divide Basin, Wyoming (JAB and Antelope) USA Development 100% interest Uranium One Australia (Proprietary) Ltd. Honeymoon Uranium Project Australia Development 51% interest The Corporation has suspended development of the following projects: Entity Project Location Status Ownership Uranium One Africa Limited Dominion Project South Africa Care and maintenance 100% interest (2) South Texas Hobson Facility and La Palangana Mining Venture Project, Texas USA Standby 99% interest Notes: (1) The Kharasan Uranium Project is in the commissioning stage; production has commenced but the mine has not yet achieved commercial production. Commercial production is achieved when a pre-defined operating level, based on the design of the plant, is maintained and the Kazakhstan Government has issued an operating license. (2) Uranium One s 100% interest is subject to a definitive purchase and sale agreement of an undivided 26% interest in the Dominion Project to its Black Economic Empowerment partner, Micawber 397 (Proprietary) Limited ( Micawber 397 ). The Micawber 397 transaction will be accounted for in the Corporation s financial statements when the risks and rewards of the transaction are deemed to have passed to Micawber 397. MANAGEMENT S DISCUSSION AND ANALYSIS 5

6 REVIEW OF OPERATIONS AKDALA URANIUM MINE Akdala is an operating acid in situ recovery ( ISR ) uranium mine located in the Suzak region of South Kazakhstan, owned indirectly as to 70% by the Corporation through the Betpak Dala joint venture, a Kazakhstan registered limited liability partnership ( Betpak Dala ). The other 30% interest is owned by JSC NAC Kazatomprom ( Kazatomprom ), a Kazakhstan state-owned company responsible for the mining and exporting of uranium in Kazakhstan. Pursuant to the terms of its subsoil use contract, the permitted production rate at the Akdala Mine is 2,600,000 pounds of U 3 O 8 (1,000 tonnes uranium ( U )) per year. Production: In line with the production plan for 2008, Akdala produced 2,676,600 pounds of U 3 O 8 (1,030 tonnes U) during 2008, of which 1,873,600 pounds of U 3 O 8 (721 tonnes U) is attributable to the Corporation. Production from Akdala in 2009 is estimated to be 2,600,000 pounds of U 3 O 8 (1,000 tonnes U), of which 1,820,000 pounds of U 3 O 8 (700 tonnes U) will be attributable to the Corporation. Operations: The following is a summary of the operational statistics (100%) for Akdala over the last four quarters: Total wells completed (including production wells) Average no. of production wells in operation Average flow rate (m 3 /hour) Concentration in solution (mg U/l) Production (lbs of U 3 O 8 ) Q , ,400 Q , ,800 Q , ,300 Q , ,100 A total of 188 wells were installed during The program for 2009, which is expected to commence during Q2 2009, provides for the installation of 164 wells to achieve the production target for the year. During 2008, three new production blocks were acidified and commissioned. Production block #24 was acidified in Q and will be commissioned when the concentration from the current production blocks reaches sub-optimal levels. Higher quantities of solution were pumped at lower head grades in order to achieve the production in 2008, as the existing production blocks are still achieving economic uranium levels. Due to the fact that it is still economical to produce uranium from the existing production blocks at lower concentrations and higher flow rates, the processing capacity of the Akdala plant was expanded during Q A seventh ion-exchange column and additional main productive solution pumps were installed in the processing plant to cope with the increased flow rate. The plant can now operate at lower concentration levels and still achieve 1,000 tonnes U capacity. The cost of the plant expansion was $3.1 million and was financed from operations. The construction of the precipitation and filtration circuit at Akdala was completed in Q The circuit enables Akdala to produce yellowcake slurry on site, with only the drying and packaging to be performed by external processing facilities. Due to technical issues experienced by the external processing facilities when introducing the yellowcake slurry produced at Akdala into their drying process, the production of yellowcake at Akdala was suspended and, as in the past, rich eluate was shipped to the external processing facility in Q2 and Q During Q4 2008, the production of yellowcake on site resumed after successful resolution of the technical issues experienced by the external processing facility. MANAGEMENT S DISCUSSION AND ANALYSIS 6

7 AKDALA URANIUM MINE - continued Financial information: The following table shows the attributable production, sales and production cost trends for Akdala over the prior eight quarters: (All figures are the Corporation s attributable share) Dec 31, 2008 Sep 30, 2008 Jun 30, months ended Mar 31, Dec 31, Sep 30, 2007 Jun 30, 2007 Mar 31, 2007 Production of U 3 O 8 in lbs 524, , , , , , , ,000 Sales of U 3 O 8 in lbs 393, , , , ,200 70, , ,200 Inventory U 3 O 8 in lbs 345, , , , ,900 1,007, , ,500 Revenues ($000 s) 21,146 56,723 49,390 22,517 61,010 8,019 23,265 41,730 Sales ($/lb of U 3 O 8 sold) Operating expenses ($000 s) 5,918 11,793 9,487 3,292 7, ,058 7,043 Operating expenses ($/lb of U 3 O 8 sold) Depreciation and depletion 4,370 8,305 6,960 2,931 6,966 1,058 2,016 4,859 ($000 s) Depreciation and depletion ($/lb of U 3 O 8 sold) Uranium revenues are recorded upon delivery of product to utilities and intermediaries and do not occur evenly throughout the year. Timing of deliveries is usually at the contracted discretion of customers within a quarter or similar time period. Annual sales of product from a mine, which is normally determined from opening inventory plus a percentage of forecast production for the year, does not always occur evenly throughout the year and could vary significantly from quarter to quarter as illustrated in the table above. Changes in revenues, net earnings / loss and cash flow are therefore affected primarily by fluctuations in contracted delivery of product from quarter to quarter as well as by changes in the price of uranium. Operating expenses are directly related to the quantity of U 3 O 8 sold and are lower in periods when the quantity of U 3 O 8 sold is lower. There is a corresponding build-up of inventory in periods when the quantity of U 3 O 8 sold is lower. The cost of production for the year at $14 per pound of U sold was in line with the Corporation s revised forecast. MANAGEMENT S DISCUSSION AND ANALYSIS 7

8 SOUTH INKAI URANIUM MINE South Inkai is an operating ISR uranium mine located in the Suzak region of South Kazakhstan, owned indirectly as to 70% by the Corporation through the Betpak Dala joint venture. The other 30% interest is held by Kazatomprom. The design capacity of the South Inkai mine is 5,200,000 pounds of U 3 O 8 (2,000 tonnes U) per year. It is expected that the annualized rate of production will reach this level in Pre-commercial production: Pre-commercial production from South Inkai was 1,131,800 pounds of U 3 O 8 (435 tonnes U) in 2008, of which 792,200 pounds of U 3 O 8 (305 tonnes U) is attributable to the Corporation. Production from South Inkai in 2009 is estimated to be 2,140,000 pounds of U 3 O 8 (825 tonnes U), of which 1,500,000 pounds of U 3 O 8 (577 tonnes U) will be attributable to the Corporation. Operations: The following is a summary of the operational statistics (100%) for South Inkai over the last four quarters: Total wells completed (including production wells) Average no. of production wells in operation Average flow rate (m 3 /hour) Concentration in solution (mg U/l) Production (lbs of U 3 O 8 ) Q ,400 Q ,300 Q ,100 Q ,000 A total of 362 wells were installed in The program for 2009 provides for the installation of 343 wells to achieve the production target for the year. Due to ongoing transportation and logistics constraints in Kazakhstan, South Inkai did not receive sufficient quantities of sulphuric acid during Q3 and early in Q to acidify production blocks as planned and the resulting lower than expected acid deliveries negatively affected the concentration of uranium in the solution as well as production in Q3 and Q By year end, the acid supply shortfall was eliminated with sufficient acid being supplied in late December The acid shortages in Q resulted in the acidification of block #5 being delayed until beginning of Industrial production: The Kazakh Ministry of Energy and Mineral Resources ( MEMR ) formally approved the commencement of industrial production at South Inkai in December The approval, which was given by way of an amendment to the South Inkai subsoil use agreement, permits South Inkai to ramp up production over the next three years to 5,200,000 pounds U 3 O 8 per year. As a result of the approval, commercial production for accounting purposes commenced at South Inkai on January 1, Inventory at South Inkai attributable to the Corporation was 808,400 pounds U 3 O 8 as at January 1, 2009 at an average cash cost of production of $18 per pound. At full capacity, Uranium One s attributable production from South Inkai is expected to be 3,640,000 pounds U 3 O 8 per year. Construction: State acceptance of the industrial complex at South Inkai was completed in December 2008, with some landscaping and asphalt work remaining to be completed in 2009 once warmer weather permits completion. To date, expenditure incurred by Betpak Dala (on a 100% basis) relating to the construction of South Inkai is $61 million; further capital expenditure (on a 100% basis) to complete the project to design capacity is expected to be $3 million. The capital expenditure on South Inkai is being funded by Betpak Dala out of operating cash flow from Akdala. MANAGEMENT S DISCUSSION AND ANALYSIS 8

9 REVIEW OF DEVELOPMENT PROJECTS - KAZAKHSTAN KHARASAN URANIUM PROJECT Kharasan is an ISR uranium development project located in the Suzak region of South Kazakhstan, owned indirectly as to 30% by the Corporation through the Kyzylkum joint venture, a Kazakhstan registered limited liability partnership ( Kyzylkum ). The remaining interests are owned as to 30% by Kazatomprom and as to 40% by Energy Asia (BVI) Ltd., which is owned by a consortium of Japanese utilities and a trading company. The design capacity of Kharasan is 5,200,000 pounds of U 3 O 8 (2,000 tonnes U) per year. It is expected that the annualized rate of production will reach this level in Pre-commercial production: Pre-commercial production from Kharasan was 31,200 pounds of U 3 O 8 (12 tonnes U) in 2008, of which 9,400 pounds of U 3 O 8 (4 tonnes U) is attributable to the Corporation. Production from Kharasan in 2009 is estimated to be 650,000 pounds of U 3 O 8 (250 tonnes U), of which 195,000 pounds of U 3 O 8 (75 tonnes U) will be attributable to the Corporation. Operations: The following is a summary of the operational statistics (100%) for Kharasan over the last four quarters: Drill rigs on site (1) Total wells completed (including production wells) Average no. of production wells in operation Average flow rate (m 3 /hour) Concentration in solution (mg U/l) Production (lbs of U 3 O 8 ) Q Q Q Q ,200 Note: (1) As at end of quarter for well field development Acidification of the first well field at Kharasan commenced in March Although the flow rate has continued to increase, both flow rate and concentration of U in solution remains low at 76.9m 3 /hour and 41.6 mg U/l, respectively. Well field maintenance work commenced at the end of Q3 2008, but was not as effective as expected. By the beginning of December 2008, a more detailed study was initiated to identify other factors contributing to wellfield underperformance. The study includes a full investigation of the original data and a review of all drilling logs to verify vertical location of screens and layout of the wellfield. Wellfield maintenance work is continuing. In November 2008, Kyzylkum appointed a new Kharasan general manager, with over 20 years experience in ISL operations in the region. In December 2008, Kyzylkum also appointed a new general director, who is recruiting experienced personnel to assist in addressing wellfield underperformance. Well installation for future well fields continued in In accordance with the plan for the year, an additional 193 wells were installed in Industrial production: A delineation drilling program to convert a sufficient amount of resources from the Russian C2 category to the Russian C1 category, consisting of a drilling program of 338 holes, is ongoing. 163 drill holes were completed in 2008 for delineation purposes, compared to a plan of 169 holes. Kyzylkum intends to make an interim application for permission to move to industrial production based on the results of an ISR operation in close proximity to Kharasan which operates under similar geological conditions. The 256 exploration holes already drilled, together with 82 holes to be completed in Q (for a total of 338 holes), as well as the performance of the pilot production block, will serve as the basis for the application. It is expected that the application will be made later in 2009 when sufficient information from the pilot production block is available. Industrial production approval is expected for Kharasan in Construction: The major operating facilities of the production complex have been inspected by the necessary regulatory authorities and final acceptance of the facilities is expected by Q To date, expenditure incurred by Kyzylkum (on a 100% basis) relating to the construction of the industrial complex at Kharasan is $47.8 million. Further capital expenditure (on a 100% basis) to complete the project to design capacity of 2,000 tonnes per year is expected to be $18 million. The capital expenditure on Kharasan is funded by Kyzylkum from the project finance facility with Japan Bank for International Cooperation ( JBIC ) and Citibank. MANAGEMENT S DISCUSSION AND ANALYSIS 9

10 KHARASAN URANIUM PROJECT - continued Infrastructure development: The railroad switching station was completed in Q and a new section of line adjacent to the main line to Moscow was transferred to the State of Kazakhstan. Private entities are not allowed to own railroad installations, except on private land. The main facilities of the transhipment base for production ramp up in 2009, including storage facilities for sulphuric acid, ammonium nitrate and caustic storage will be commissioned in Q Total expenditure incurred by Kyzylkum (on a 100% basis) to date relating to infrastructure development at Kharasan amounts to $60.0 million with further capital expenditure (on a 100% basis) to complete the required infrastructure expected to be $2 million. A consortium agreement was concluded with an adjacent uranium ISR development joint venture to share in the development cost of the local infrastructure required to support both operations (road, bridge, rail and marshalling facilities). The agreement resulted in a return of $22.6 million in capital to Kyzylkum relating to infrastructure amounts expended to date. The development of infrastructure is jointly funded by an adjacent uranium ISR development joint venture and by Kyzylkum from a project finance facility provided by the JBIC and Citibank. Project finance facility: In addition to the original $80 million loan from the Corporation, Kyzylkum negotiated unsecured bank loan facilities in Q totalling $100 million. One facility, in the amount of $70 million, was obtained from JBIC and the other facility, in the amount of $30 million, was obtained from Citibank. During December 2008, Citibank agreed to increase its facility by $60 million to $90 million, increasing the total unsecured bank loan facilities to $160 million. Total draw downs against these facilities amounted to $120 million as at December 31, The original $80 million loan from the Corporation (principal of $46.7 million outstanding as at December 31, 2008) must be repaid in full before the JBIC and Citibank facilities can be repaid. As the Corporation proportionately consolidates its 30% interest in Kyzylkum, the Corporation s share of these facilities amounts to $36 million. When the $160 million facility is fully drawn down, the Corporation s share of these facilities will amount to $48 million. The loan facilities have floating interest rates of LIBOR plus 0.25% and 0.35%, respectively. SULPHURIC ACID SUPPLY IN KAZAKHSTAN Kazakhmys commissioned a new sulphuric acid plant located at Balkhash in eastern Kazakhstan in June This plant, which has an annual capacity of 1.2 million tonnes of sulphuric acid, provides Kazakh uranium producers, including the Corporation s Betpak Dala and Kyzylkum joint ventures, with a significant additional source of sulphuric acid in the country. The Corporation does not expect the production of sulphuric acid from the Balkhash plant to be affected by Kazakhmys reduced copper production and expects that Balkhash will remain a reliable supplier of sulphuric acid in Kazakhstan. The logistical constraints experienced earlier in 2008 eased towards the end of 2008 and the early part of 2009 and are not expected to delay sulphuric acid deliveries in Q Given the recent worldwide economic downturn, the Corporation expects a decline in demand for sulphuric acid over the short to medium term, with supply remaining largely intact and that additional sources of sulphuric acid may therefore become available to the Corporation. Betpak Dala entered into a contract for the supply of 35,000 tonnes of sulphuric acid at market related prices during Together with the 60,000 tonnes allocated to Betpak Dala in 2009 by Kazatomprom, Betpak Dala should have sufficient supply of sulphuric acid to meet the 2009 production targets for both Akdala and South Inkai. Betpak Dala received the first delivery under this contract in February 2009 according to the agreed schedule. Kyzylkum received a sufficient sulphuric acid allocation during Q to enable Kharasan to continue planned wellfield acidification and to facilitate its planned production ramp-up. Kyzylkum s allocation of sulphuric acid from Kazatomprom is expected to be sufficient to meet the 2009 production target for Kharasan. To ensure long term sulphuric acid supply continuity, the Corporation has established a joint venture with Kazatomprom and other affected parties to build a sulphuric acid plant near Kharasan at Zhanakorgan. The Corporation s ownership percentage in this joint venture is expected to be 19%. The total construction cost of the plant is expected to be approximately $217 million, of which approximately 30% will be funded by the joint venture partners during Q and the first half of 2009 and the balance potentially funded through debt financing. Construction of the plant is expected to be completed in The Corporation contributed $6.0 million in Q towards construction of the sulphuric acid plant and will contribute $6 million from working capital in the first half of 2009, with the balance of approximately $29 million to be funded in 2010 and Engineering design is already in progress with the Italian construction company Desmet Ballestra, including cooperation with LLP Joint Venture Soyuzcomplect for engineering work on the power plant. Equipment orders are in progress, with delivery of equipment starting in mid MANAGEMENT S DISCUSSION AND ANALYSIS 10

11 NEW TAX CODE IN KAZAKHSTAN Kazakhstan adopted a new Tax Code effective January 1, Among other things, the new Code reduces the corporate income tax rate from 30% to 20% for 2009, amends the basis for determining excess profits tax and replaces royalty charges with a mineral extraction tax. Mineral extraction tax, which has a different tax basis from the system of royalty charges it replaced, is levied at a rate of 22% for For uranium, the mineral extraction tax is calculated according to a formula related to the cost of production, rather than revenue. The new Tax Code also abolished the former contractual stabilization regime relating to the taxation of subsoil users, except for those operating under product sharing agreements and subsoil use contracts approved by the President of Kazakhstan (Akdala has a stability clause in its subsoil use contract; the subsoil use contracts for South Inkai and Kharasan, which are of more recent date, do not have such provisions). There is considerable uncertainty surrounding the interpretation and application of the new Tax Code to the operations of Betpak Dala and Kyzylkum, including with respect both to excess profits tax and the effect on the stability clause in Akdala s subsoil use contract. At the request of the MEMR, Betpak Dala and Kyzylkum will be entering into discussions with the MEMR later this year on the application of the new Tax Code to their operations. Pending the outcome of these discussions, the Corporation, together with its joint venture partners and its tax advisers, will continue to evaluate the impact of the new Code on its operations in Kazakhstan. Given the current uncertainty relating to the interpretation and application of the new Tax Code, the Corporation has not given effect to the provisions of the new Tax Code in its 2008 consolidated financial statements. MANAGEMENT S DISCUSSION AND ANALYSIS 11

12 REVIEW OF DEVELOPMENT PROJECTS UNITED STATES The Corporation is proceeding with the planned development of new uranium production centres in the western United States. In Wyoming, the Corporation is focussed on permitting two ISR central processing plants, one at Moore Ranch in the Powder River Basin and the other at Antelope in the Great Divide Basin. In Texas, the Corporation has completed renovation of the Hobson central processing plant; operation of that facility has, however, been suspended pending the delineation of additional resources and the receipt of all required permits. POWDER RIVER BASIN, WYOMING The Powder River Basin in Wyoming hosts several of the Corporation s uranium projects. The most advanced project in the Powder River Basin is the Moore Ranch Project, located in Campbell County, 25 miles east of Edgerton, Wyoming. Moore Ranch has a NI compliant measured resource suitable for in situ recovery. The Corporation intends to construct an in situ uranium recovery facility at Moore Ranch with capacity of 2,000,000 pounds of U 3 O 8 per year. Uranium extraction is planned to commence at Moore Ranch in Any excess plant capacity would be used to process uranium bearing resins from other properties owned by the Corporation in the Powder River Basin. In October 2007, the Corporation submitted an application to the U.S. Nuclear Regulatory Commission ( NRC ) for a license to construct and operate an in situ uranium recovery facility at Moore Ranch. The application was the first of its kind received by the NRC since The Corporation also submitted at the same time an application to the Wyoming Department for Environmental Quality ( WDEQ ) for a mining permit. The NRC and WDEQ technical reviews of the application to build and operate an in situ uranium recovery facility at the Moore Ranch Project are currently in progress. The Corporation is continuing to progress these applications and expects to receive the license and permit during Q Baseline characterization efforts in support of similar license and permit applications for the Ludeman project in Converse County have been completed and will be submitted to the NRC and WDEQ in March Assuming a two year licensing process, the Corporation anticipates receiving the license and permit during early 2011, with initial production from Ludeman late in The Ludeman project will be licensed as three satellite operations that can feed either the Moore Ranch central processing plant or another plant. The Corporation resumed wellfield development drilling at Moore Ranch in January In 2009, 90 drill holes are planned to complete delineation of the first well field. Another 270 drill holes are planned this year to extend existing mineralized trends on the property. Monitor well ring installation is also planned for this year after receipt of regulatory approval and finalization of the design of the first and second well field. Cased well installation in the well field will follow after issuance of the required licenses and permits. The Corporation has revised its mine plans and economic models for its United States development assets during Q and concluded that the carrying values of its United States development assets exceeded their fair value. The carrying value of Moore Ranch and the Corporation s other United States development assets were therefore written down by $204.3 million. The Corporation intends to complete additional delineation drilling and data purchases at its Ludeman and Peterson properties during Delineation drilling and data collection for permitting purposes are also scheduled in 2009 at other Powder River Basin properties, including the Allemand-Ross and Barge projects. In total, capital expenditure of approximately $17 million is planned in 2009 for the Corporation s Powder River Basin properties. GREAT DIVIDE BASIN, WYOMING The Corporation s principal properties in the Great Divide Basin are the JAB and Antelope projects. JAB has a NI compliant measured and indicated resource suitable for in situ recovery. A central processing facility is planned for construction at the Antelope project, with a satellite facility at JAB. The central processing facility has a design capacity of 2,000,000 pounds of U 3 O 8 per year. In addition to processing resin from the satellite plant on JAB, the Antelope central processing facility would have the capacity to accept resins from other Uranium One projects in the Great Divide Basin. Those potential projects include Twin Buttes, Cyclone Rim, West JAB, Stewart Creek, Crooks Creek and Bull Springs. In July 2008, the Corporation submitted licensing and permit applications for Antelope and JAB to the NRC and WDEQ. Delineation drilling is ongoing at Antelope; since August 2008 a total of 254 holes have been drilled, and another 400 drill holes are planned in 2009 to further define and delineate proposed well field areas. In total, capital expenditure of approximately $4 million is planned in 2009 for the Corporation s Great Divide Basin properties. MANAGEMENT S DISCUSSION AND ANALYSIS 12

13 HOBSON AND LA PALANGANA The Hobson Facility is an ISR uranium processing facility located near to the town of Hobson in Karnes County, Texas. The refurbishment of the processing plant, to a capacity of a nominal 1,000,000 pounds of U 3 O 8 per year of dried natural uranium concentrate, was completed in July The Palangana Uranium Project is an ISR amenable deposit located five miles north of the town of Benavides in Duval County, Texas. During 2008, a better understanding of the extensive faulting on and near the Palangana salt dome led the Corporation to re-interpret the previously reported inferred resource of 5.8 million pounds U 3 O 8, with the result that this resource was re-classified and removed from the Corporation s resource inventory. An impairment of $83.4 million was recognized on Hobson and La Palangana in 2008, to account for the reduction in the fair value of the Hobson facility and the reduction in the recoverable resources in the Palangana mine plan. Operation of the Hobson plant, and further capital expenditure at La Palangana, were suspended in late 2008 pending the delineation of additional resources and the completion of the permitting process. In the meantime, the Corporation will continue with planned delineation drilling and the acquisition of additional potential development areas. UNITED STATES CONVENTIONAL URANIUM PROPERTIES The Corporation is continuing to assess the resource potential of conventional uranium properties mainly in Utah, Colorado and Arizona. These properties include the Corporation s Frank M, Velvet, Woods and Breccia Pipes properties. In 2008, the Corporation concluded that the Shootaring Canyon Mill could not be operated economically with the currently available resource base and fully wrote down the carrying value of the mill, due to its negligible salvage value. The Corporation evaluated the economic feasibility of its conventional mining properties as well and concluded that certain of its properties cannot be put to economic use in the current economic environment. The total associated impairment was $65.3 million. Care and maintenance costs for the Shootaring mill are expected to be approximately $1.3 million per year. The Corporation does not plan any capital expenditure on its conventional uranium properties during MANAGEMENT S DISCUSSION AND ANALYSIS 13

14 REVIEW OF DEVELOPMENT PROJECTS AUSTRALIA HONEYMOON URANIUM PROJECT The Honeymoon Uranium Project is located in South Australia, approximately 75 kilometres northwest of the City of Broken Hill, New South Wales. The project has a design capacity of 880,000 pounds of U 3 O 8 per year, with an expected mine life (including production ramp-up) of six years. The revised capital expenditure estimate for the completion of construction at Honeymoon is A$118 million, of which A$39 has been spent to date, on a 100% basis. The Corporation received approval to commence construction at Honeymoon in January 2008 from the South Australian regulatory authorities. In Q1 of 2008, the Corporation postponed the development of Honeymoon pending a review of strategic options for its Australian business. In October 2008 the Corporation reached an agreement with Mitsui & Co., Ltd. under which Mitsui would acquire a 49% interest in the Honeymoon project and the company s Australian exploration portfolio. This transaction closed in December 2008, after receipt of required regulatory approvals. Under this agreement, the total minimum cash commitment from Mitsui is approximately A$104 million for its share of Uranium One Australia s assets. The majority of these funds will be used to advance the development of the Honeymoon project through to commercial production which is scheduled for Pursuant to the terms of the Honeymoon joint venture agreement, the Corporation committed up to A$49.8 million of the proceeds from the investment by Mitsui to fund its share of Honeymoon s development expenditures. An impairment of $195.4 million was recorded against the Corporation s Australian assets in 2008, to reflect the fair value ascribed to these assets in the Mitsui transaction. REVIEW OF PROJECTS SOUTH AFRICA DOMINION The Dominion Project is situated in the North West Province of South Africa, approximately 150 kilometres west-southwest of Johannesburg. The Project was placed on care and maintenance on October 22, The decision to place Dominion on care and maintenance reflected the significant deterioration in the Project s economics associated with the continuing decline in uranium prices during 2008 and significant inflation-related increases in project costs, together with a slower than expected ramp-up in development and production. The decision followed the completion of the Corporation s detailed life of mine planning process and budget for the Project, which showed that the Project would require a sustained recovery in uranium prices, as well as significant additional capital investment, in order to become economically viable. As a result of the determination by the Corporation that the Dominion Project is not economically viable and a subsequent reinterpretation of the project s mineral resources, the previously published reserves for the project can no longer be considered reserves. The majority of the workforce at Dominion has been retrenched in accordance with the requirements of applicable South African legislation; a core team of employees has been retained to oversee care and maintenance activities. The costs associated with the suspension of operations were $17.5 million in Q4 2008, with further potential suspension costs of approximately $3 million, and care and maintenance costs of approximately $12 million per year thereafter. Care and maintenance activities will include limited development activities. As Dominion was placed on care and maintenance without certainty as to when or whether production might be resumed, an impairment of $1.8 billion was recognized in The Corporation carries unrealized foreign exchange translation losses of $244.8 million in accumulated other comprehensive losses relating to the translation to US dollars of its investment in Uranium One Africa Limited ( Uranium One Africa ), the wholly owned subsidiary which owns the Project. The foreign exchange losses were not taken into consideration in calculating the impairment on Dominion and would only be realized in the statement of operations if the Corporation sells its investment in Uranium One Africa. The value of the losses is calculated based on the South African rand and US dollar exchange rates and will change as exchange rates change. EXPLORATION PROJECTS The Corporation is exploring its other properties and has current exploration programs in progress on its properties in South Africa, the western United States and Australia. During 2008, impairments of $936.6 million were recognized on various United States exploration properties due to a range of factors including economic feasibility, cancellation of option agreements, metallurgical recovery, licensing and environmental issues. MANAGEMENT S DISCUSSION AND ANALYSIS 14

15 CORPORATE PRIVATE PLACEMENT WITH JAPANESE CONSORTIUM On February 9, 2009, Uranium One entered into a subscription agreement with a special purpose corporation formed by The Tokyo Electric Power Company, Incorporated ( TEPCO ), Toshiba Corporation, and The Japan Bank for International Cooperation ( JBIC ) (collectively, the Consortium ) providing for the private placement of an aggregate of 117,000,000 common shares of Uranium One, for gross proceeds of approximately C$270 million. TEPCO and Toshiba Corporation will each have a 40% equity interest in the special purpose corporation; JBIC will have a 20% equity interest. Concurrently with the execution of the subscription agreement, Uranium One has also entered into a long-term offtake agreement and a strategic relationship agreement with the Consortium, both of which will become effective upon closing of the private placement. Under the offtake agreement, the Consortium may elect to purchase, on industry-standard terms, up to 20% of the Corporation s available production from the Corporation s existing uranium projects for which it has marketing rights and will have access to production of the Corporation s future projects if it maintains its equity interest in Uranium One above certain equity ownership levels. Deliveries under the offtake agreement to the Consortium members will commence in Under the strategic relationship agreement, the Consortium may appoint two directors to the Uranium One board and has a right of first opportunity to invest in any uranium mining asset or project which the Corporation may in its discretion decide to make available to third parties. In addition, the Consortium may second two employees to Uranium One, and will have representation on an inter-company coordinating committee. This agreement also contains a standstill provision under which the Consortium has agreed, subject to certain exceptions, not to acquire without Uranium One s prior approval more than 19.95% of Uranium One s issued common shares. The rights granted under both the offtake agreement and the strategic partnership agreement are generally subject to the Consortium continuing to meet certain equity ownership thresholds. The private placement issue price of C$2.30 per share represented a 15% premium to the 20-day volume weighted average price of Uranium One common shares on the Toronto Stock Exchange prior to the announcement of the transaction. Upon closing of the private placement, the Consortium will have a 19.95% equity stake in Uranium One. The proceeds from the private placement are expected to be used for general corporate purposes, to accelerate the Corporation s growth and development plans and will allow the Corporation to take advantage of any value-enhancing acquisition or partnership opportunities that may arise. Closing of the transaction is subject to the receipt of certain regulatory approvals. CREDIT FACILITY The Corporation concluded a senior secured revolving credit facility with Bank of Montreal and The Bank of Nova Scotia at the end of Q Under the terms of the facility, the Corporation has the ability to borrow up to $100 million; the facility has a two year term, and may be extended for a further year with lender consent. The Corporation drew down $65 million under the credit facility on October 20, The effective interest rate on the loan up to December 31, 2008 was 4.1% per year and the loan currently bears interest at 1.8% per year. Additionally, a letter of credit in the amount of $12.9 million was issued under the credit facility on September 25, 2008 as security for a uranium loan of 200,000 pounds of U 3 O 8. Undrawn amounts under the facility are currently subject to a commitment fee of 0.40%. Draw downs under the facility may be used for general corporate purposes, including working capital requirements and funding capital expenditures and acquisitions. The credit facility requires the Corporation to maintain an interest coverage ratio, measured on a rolling four quarter basis, of at least 2.5:1. The interest coverage ratio is calculated as the ratio of the Corporation s earnings before interest, taxes, share based compensation, depreciation and depletion and other non-cash items to interest paid. The Corporation s interest coverage ratio at December 31, 2008, calculated in accordance with the credit agreement, was 10.5:1. SALE OF SHAREHOLDING IN AFLEASE GOLD On April 8, 2008 the Corporation sold million Aflease Gold shares for $41.3 million (ZAR320 million). An option granted to the purchaser to acquire Uranium One Africa s remaining shareholding in Aflease Gold lapsed on May 8, Prior to year end, the Corporation sold an additional 12.5 million Aflease Gold shares for $3.2 million (ZAR25.9 million), decreasing the Corporation s shareholding to 34% at year end. The assets and liabilities of Aflease Gold have been classified as discontinued operations for all periods presented in the consolidated financial statements. The Corporation wrote down the investment to its fair market value as at December 31, 2008, resulting in an impairment of $121.3 million. Subsequent to December 31, 2008, the Corporation sold a further million Aflease Gold shares for proceeds of $16.2 million (including a deposit of $3.1 million received in 2008), decreasing the Corporation s shareholding in Aflease Gold to 6%. MANAGEMENT S DISCUSSION AND ANALYSIS 15